The proper distinction of the Law and the Gospel in God’s Word is, according to the Lutheran understanding, the mark of a true theologian. Confuse, mix, or otherwise mishandle them, and the Gospel will be lost. And when the Gospel is lost, faith is destroyed, and salvation is lost also. Plenty has been written on the subject, and C.F.W. Walther’s Law and Gospel remains a great work to go to (or Bo Giertz’s Hammer of God, if you prefer fiction to non-fiction, story to proposition).
Over the last couple of years, this topic has been the subject of renewed frenzy in the blogosphere, thanks both to a seeming controversy over the so-called third use of the Law, and also with the high-profile adoption of the Law-Gospel distinction by high-profile non-Lutherans. The most high-profile of this crop is probably Tullian Tchividjian, who has written several books on the topic, fallen out with The Gospel Coalition and started a whole new online ministry, Liberate [at the time of writing, Liberate.org is on a hiatus].
All of this has been very controversial, in the sense of stirring a controversy.
It seems to me that this controversy has in part been over mere words, with people talking past each other. Jargon is to blame for this, at least in part. When jargon and other shorthand is used, each speaker comes to the conversation with their pre-loaded semantic field for each term. If those terms are not unpacked in longhand, misunderstandings are inevitable.
There is a radical distinction between the Law and the Gospel in God’s word. The Law contains God’s demands on what we are to do, whereas the Gospel is God’s unconditional promise of grace through the life, death and resurrection of Jesus Christ. So much is uncontroversial (if you are a Lutheran, at least). What manner of distinction it is, however, is another matter. This is where we risk running into problems.